Note: This is my next post in my series The ABCs of Buying, Selling and Investing in Real Estate. Each post, I select a letter (I for this one) and then write a fictional advice column around it. The story is fake but the advice is very real(ty).
This is a continuation of the story found in the post, Three Things to Know about Buying Land as an Investment.
Isaac had called me the previous week to ask me about the benefits of buying land as an investment. I didn’t have any experience in land sales or purchases so I called upon my colleague to answer his question. The next week, Isaac came into my office to ask some further questions. He was leaning towards buying the land across the way from his ranch and understood the benefits and minuses of buying land as an investment. He wanted more information, however, He was curious about what you do with land once you purchase it. He also had heard that there was some rollback taxes to take into consideration if he ever decided to change the use of the land. What was that all about? He asked me as he sipped the coffee I had gotten him. He didn’t see him doing much with the land beyond what he is doing with his current ranch, but wanted to know some of his options and what each one meant from a tax perspective.
This is what I told Isaac….
First, I reminded Isaac that I really didn’t have much experience in selling or buying raw land. What I knew, I had heard about from other realtors or friends who owned some acreage. The Ag rollback was also drilled into us during my days of taking my real estate accreditation courses. I knew the theory behind the rollbacks and why it happens the way it does. Otherwise, I was not really the appropriate person to be telling him anything about the uses of raw land. Since my colleague was busy with his business, I didn’t feel comfortable going back to him. He understood all of this, but said he trusted me and wanted to know what I did know. It was better than nothing at all. I told him to give me a week to refresh my memory on the tax rollbacks and look more closely into some of the uses of land that I had been told. He agreed to meet me at the office at the same time the following week. When he arrived the next week, I had done my research so I was proud to be able to let him know three interesting things I had learned about buying land as an investment.
1, Ag Tax Rollbacks. This was a topic that was covered briefly in my real estate foundation classes, but it was an oddity enough that I have never forgotten about the basic premise behind these rollbacks. To reinforce my own understanding, I went to the Texas A&M University Real Estate Center, who has a vast database covering all things real estate. I found this article which goes into facts and fiction about the rollbacks. Tax rollbacks are taxes owed from previous years that have been reinstated by a taxing authority. With ag rollbacks, any land previously designed as agricultural by the tax authority that is changed to a different designation, like residential, the taxes from the previous five years plus current year are owed by the land owner making the change. The document further states that an additional five years can be charged to the landowner. In other words, if a developer buys some raw land that was designated as agricultural, this company/person can be charged for the back taxes for up to 11 years. When buying land as an investment, investors should take this into consideration. If they plan to do anything different with the tax designation, you are looking at at large tax bill coming your way. Of course, these items can be used when negotiating the price of the raw land so some savings might be realized. However, it is never a good idea to go blind into purchasing land without a solid plan in place about how to use the land and pay the back taxes if necessary.
2. Subdividing Land for Developers – The second interesting thing about buying land as an investment is the concept of making more money by subdividing the land and sell it out as parcels. The lotnetwork.com had this great article on the benefits of subdividing land and selling it to developers. Here is what they outlined in the article.
Successfully subdividing your land into residential lots can have many benefits, including providing a landowner both increased profits and flexibility. If you are buying or already have a large parcel of land for sale, or even a home lot that has “extra” land area, you may wish to consider whether subdividing your land can help you maximize your real estate resources, something that many landowners are evaluating in the current market conditions.
The article does a fantastic job of explaining the benefits and drawbacks to doing this. Benefits include a higher profit motive, being able to keep part of the land for yourself and the land being more marketable in plats versus the entire tract of land. Drawbacks include it can be complex if you are tying to do a large tract of land and requires bringing in experts to help with the process. Another drawback is that you might be required to bring in the local municipality to help build the needed infrastructure like roads and utilities. The government will want to get their share by charging the landowner some hefty impact fees. Be sure to do your homework before taking this step when buying land as investment.
3. Deer Lease 101 – My last interesting thing about buying land as an investment is dealing with getting a lease for hunting for the land. I am focusing specific on deer lease since I live in Texas. I am an Eagle Scout, so I grew up hearing about leases for hunting deer from all my fellow scouts. I have never gone deer hunting myself, but would welcome a chance to do so the idea of using a deer lease to earn some extra income from some land I own is very appealing to me. This article, once again from the Texas A&M Center, does a really good job of explaining all the basic facts of owning a deer lease. Most of the article details what provisions are needed when drafting up a lease agreement for the hunters. It then goes into a lot more detail on the liabilities of the practice and what you need to know to minimize your risk. Deer lease could be a good way to generate some cash flow for a piece of land you buy as an investment.
Isaac was impressed with what I had found out in my research. He knew about the Ag rollbacks already since he had his ranch in place. He was not sure about platting the extra land to developers. He laughed and said he wasn’t sure he wanted a bunch of people near him since he was a hermit by nature. The hunting leases made the most sense to him since all he wanted to do was keep the land in its current pristine state including leaving the wildlife intact. I ended our conversation by reminding him that I was not an expert and he needed to be sure to look up the articles I referenced for more information on the topic.